The recent uptick in rates serves as a reminder that refinance markets do not last forever. Eventually, rates rise, and when they do, it’s smart to have a strategy in place to grow purchase originations. One of the best bets in today’s market is adding government and conventional renovation (reno) loan offerings.
That’s because reno loans resolve two ongoing problems homebuyers face that are not going away even if rates stay low.
Aging housing stock – According to the Joint Center for Housing Studies of Harvard University, 40% of the nation’s 137 million homes are at least 50 years old, and the remodeling share of residential investment is above 55%. This is an increase from historical shares of 40% to 45% before the housing crash. With the drop in new home construction, these houses could become more attractive to homebuyers if they had viable options to renovate them.
The lack of inventory – Falling construction starts combined with the lack of affordable new homes have put many potential home buyers – especially first-time homebuyers – at a disadvantage. Since homebuilders make more money building move-up homes, those two factors are unlikely to change anytime soon.
The fact that there are now renovation loans offered by both Fannie Mae and Freddie Mac as well as through Federal Housing Administration (FHA) and the Veteran’s Administration (VA) is a sign that the idea of renovations is taking hold.
Both government and GSE officials see the need for consumers to have access to renovation financing. While FHA recently cut the cash-out ratio on 203(b) purchase loans to a max of 80% combined loan to value (CLTV), the change was not applied to 203(k), the agency’s renovation product. A renovation loan is considered a rate and term refinance and the max CLTV is not only higher – 97.75% – it’s based on after-completion value. That significant LTV difference represents a strong endorsement of renovation lending and more opportunities for homeowners.
Aging Housing Stock
Whether it’s used for simple fixture and finish updates or for a complete customization, a renovation loan for an older home can improve the aging housing stock. Having the option to renovate dated homes that are currently on the market can significantly improve the number of originations from first-time homebuyers and those looking to move out of their starter homes. The key is to educate real estate agents to look at those homes in a different way.
Many times real estate agents have passed on showing or listing these homes because they may have issues (wood paneling, shag carpet or popcorn ceilings, for example). They list these properties as “fixer-upper,” “needs TLC” or even “investor only.”
Instead, these properties could very well become dream homes if they are positioned that way by an agent who suggests a renovation loan. This means that mortgage companies need to educate real estate agents on the types of renovation loans available and about ways to share renovation loan information with potential homeowners. For instance, a first-time homebuyer could make an offer on a cash-only listing, if they understand their renovation options.
Lack of Inventory
Renovation loans can increase the number of properties viewed as desirable homes, once homebuyers are educated to see the possibilities. Since properties in need of improvement typically list for less than comparable homes with modern updates, renovation home loans increase the number of properties that are financially in reach for homebuyers. Not only can homebuyers use a renovation home loan to buy a more affordable home, they also benefit financially from any value added by their renovations.
Renovation loans are an avenue for expanding local housing inventory that appeals to homebuyers. When a homebuyer is shopping for a house in their prospective market, they envision the home they want. For many of today’s homebuyers, that vision doesn’t match up with the home they can afford or the neighborhood where they want to live.
With a little help from an educated Realtor®, homebuyers can see a house for what it could be, rather than only considering it based on its current age and condition. Renovation loans literally turn houses into homes.
Armed with a solid construction plan and the right financing, homebuyers can add value by upgrading the smallest, or least updated house on the block, or transforming a home in an up-and-coming neighborhood.
First-time homebuyers can get kitchens with all new free-standing appliances or bathrooms that feel like spas. They can add another bedroom, knock down a wall to open up a living room and so much more. The industry is beginning to appreciate the merits of renovation loans and what they can do for the market in terms of inventory and getting qualified borrowers into homes they can make their own. We are finally understanding the value these loans can offer a borrower. And with rising rates environment, why not have another product in your arsenal?
About The Author
Vince Nepolitan is the national renovation product manager for Planet Home Lending. He has specialized in renovation financing for 18 years. Founded in 2007, Planet Home Lending is a privately held, national residential mortgage lender with multiple business channels uniquely positioned to provide competitive products and services. It is an approved originator and servicer for FHA, VA, and USDA, a Freddie Mac and Fannie Mae Seller/Servicer, and a full Ginnie Mae Issuer and approved sub-servicer.